During unpredictable conflicts, the best strategy is not to make aggressive bets but to maintain light positioning. Chasing headlines is exhausting, and it's better to miss the first market move in exchange for greater certainty, even if a base-case scenario exists.
An attractive entry into Emerging Market FX requires one of three conditions: extreme negative investor positioning, deeply cheap valuations, or defensive central bank action. According to J.P. Morgan, none of these are present, meaning there's no compelling asymmetric opportunity for investors to buy in.
Initially, rising EM yields were almost entirely driven by higher U.S. Treasury yields, not increased credit risk. This has shifted; spreads are now widening independently as global growth concerns mount, indicating the market is finally pricing in a genuine credit risk premium.
Unlike the 2022 energy shock post-Ukraine invasion, the current market is not emerging from a decade of zero interest rates. U.S. real rates are already positive, and EM economies have built up buffers after being stress-tested, making a repeat of 2022's widespread defaults less likely.